China’s switch from fledgling asset management market to global pioneer in online fund sales is one of the standout stories of the past few years.
Back in 2012, Chinese people made just a handful of fund purchases online; most transactions were carried out using banks or fund managers in person.
Today, more than two-thirds of investors subscribe to funds via mobile phone apps, according to a survey by the Asset Management Association of China.
This represents an increase on the previous year’s survey when 41 per cent of investors said they used mobile apps to buy funds. Despite the leap, mobile fund sales are likely to account for a much smaller proportion of total fund assets as many investors do not commit large sums, says Howhow Zhang, director of KPMG China’s global strategy group.
The digital fund sales boom has caught the eye of domestic and foreign asset managers, who see a chance to access a swath of investors in one of the fastest-growing investment markets.
According to Oliver Wyman, the financial consultancy, assets under management at Chinese fund companies reached $7.4tn at the end of 2017, up from $1.6tn in 2012. It estimates that the amount will be $14tn by 2022.
While China’s revolution is probably to be expected in a country where nine in 10 people go online via their mobile phones, it is intriguing in comparison with the US and Europe: both are established fund markets where digital fund sales have not gone mainstream.
The Chinese online investment market now faces a pivotal moment because of dwindling returns on funds that have been the bread and butter of digital fund transactions.
The first wave of online investments were low-risk money market funds — products that typically invest in cash and super-safe short-term debt. Money market funds remain the most popular investments sold on mobile apps and account for 60 per cent of the total Chinese fund market, according to Hui Miao, senior analyst at Cerulli Associates, the research company.
China’s flagship money market fund, the Yu’E Bao fund offered by ecommerce giant Alibaba and local fund house Tianhong Asset Management, which launched in 2013, laid the foundation for the online investment market and spawned a wave of copycat products.
Yu’E Bao, which translates as “leftover treasure”, is offered through Alibaba’s online payment service, Alipay. It is intended as a way for users to earn returns on spare cash sitting in their online account.
Ms Hui says that Yu’E Bao was a “game-changer” because of the way it democratised investing by allowing ordinary consumers to try it without going to a bank; it also allowed investors to switch in and out of it with ease. Two years ago the fund overtook a rival JPMorgan product to become the world’s largest money market fund.
Rival tech companies, such as Tencent, which operates social networking platform WeChat, subsequently muscled into the market, as did banks and fund managers that feared losing investors.
“Alibaba woke Chinese banks from their slumber and inspired them to upgrade their tech platforms,” says Mr Zhang.
Online investors were drawn to Yu’E Bao and the host of online money market funds that came in its wake by the prospect of decent returns at relatively low risk.
Now, however, yields are falling in the wake of monetary easing by the People’s Bank of China. The annualised seven-day yield on the Yu’E Bao fund fell from a peak of 4.37 per cent at the start of 2018 to 2.6 per cent at the end of the year. Alibaba has since expanded its range of money market funds but yields on the new products hover between 2.5 and 3 per cent.
Yoon Ng, director of Asia-Pacific at Broadridge, the research company, says asset managers have reacted to falling yields by bringing riskier products to the online market, such as equity and bond funds.
Ms Hui says Chinese investors’ sensitivity to returns is leading them to consider placing money in riskier products. Their behaviour, though, is still heavily influenced by market movements. “If they see the stock market is going up, they will opt in for equity assets, but in a bear market they will go into money market funds or bond funds,” she says.
Investors poured money into equity funds last year, with flows reaching their highest level in seven years. Ms Hui says investors moved to take advantage of low stock prices in the hope of winning big on an expected rebound.
The big question for fund managers is whether investors will ditch their short-term attitude towards savings, which involves scouring the market for the best rates and switching in and out of funds accordingly.
Ms Ng says that there is little evidence so far that investors have adopted a longer-term approach. “There is still a hunting mentality [which means that] long-term mutual funds have not gained traction.”
Mr Zhang says that educating Chinese consumers about investing will be “the next battleground” for asset managers. The challenge will be getting investors who treat buying a fund like buying a stock to think about issues such as diversification and income generation.
“To go beyond selling money market funds, [the investment industry] needs to make investors understand why they need a longer-term plan, why they need to live with volatility and why [investing] is not risk free,” says Mr Zhang.
Ms Hui notes that since the Chinese asset management sector is only two decades old, investors have not yet endured multiple market cycles. “In the US, investors are educated after several rounds of stock market movements, so they realise the risk. In China it’s an ongoing process.”
One development that is expected to help Chinese investors shift to a long-term mentality is the increase in investment advice. Ms Ng says this could either come through online investment advice, known as robo-advice, or a hybrid service that combines automated suggestions with a human touch.
There are already a handful of prominent robo-advisers in China. China Merchants Bank has Mo’jie, its own service, as does insurance company Ping An. There are also several independent players such as CreditEase. The market remains small, however. According to Ms Ng, execution-only fund transactions still outweigh advised fund sales.
The Chinese regulator is considering a new framework that will better regulate investment advisory institutions, including robo-advisers. At present there are no official regulations governing these platforms.
The move could create opportunities for foreign robo-advice providers. Last month, Ignites Asia, a sister publication of the Financial Times, reported that US investment manager Vanguard was talking to Ant Financial, Alibaba’s financial services subsidiary, about a joint venture to offer investment advisory services in China. Vanguard, which declined to comment when contacted by FTfm, already operates a robo-advisory business in the US known as Vanguard Personal Advisor Services.
Peter Alexander, founder of consultancy Z-Ben, says that despite the disruptive way in which digital investing came into being, the shift has not resulted in a material change in the economic dynamics of fund distribution.
Banks still dominate the sale of funds in China both in terms of direct sales via their own mobile apps and by serving as intermediaries for online financial adviser supermarkets. This means that the cost of investing has remained broadly the same, says Mr Alexander.
He says foreign fund managers that hope to crack China’s digital investment market will need to think creatively about how to access distribution in an economical way.
While breaking the stranglehold of Chinese banks may seem like an uphill struggle, Mr Alexander points to the disruptive example of Yu’E Bao.
“The Chinese financial market is far more innovative and open-minded [in terms of] challenging the status quo,” he says.
“In the space of five years, [Alibaba and Tianhong] were able to create the world’s largest money market fund. They beat the banks at their own business.”
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